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Over the last few years, increasing numbers of hedge fund managers have been using the UCITS vehicle to wrap up their strategies, which have also significantly broadened and deepened. DATA INCLUDES: Absolute UCITS Awards winners 2012: Fund name, fund managers, 12-month return, Sharpe ratio.

Over the last few years, increasing numbers of hedge fund
managers have been using the UCITS vehicle to wrap up their
strategies, which have also significantly broadened and
deepened.

European equity had dominated the alternative UCITS strategy
universe, with 78 funds and assets under management of $17
billion, when HedgeFund Intelligence started tracking the
universe in June 2010. At that time, the database had 254 funds
with $46 billion of assets under management.

Two years later, fixed income as well as multi-strategy and
mixed arbitrage are the dominant strategies with assets under
management of $24 billion and $23 billion, respectively, at the
end of June 2012. These strategies account for the three
largest funds in the alternative UCITS sector by assets, namely
Standard Life Investments– Global Absolute Return
Strategies, M&G Optimal Income Fund and JB BF Absolute
Return Bond Fund.

Although European equity is now only the third-biggest
strategy with assets under management amounting to $15.5
billion at the end of June 2012, it still boasts the largest
number of funds which currently stands at 91. European equity
reigned supreme until June 2011, but the strategy was knocked
off its perch by turbulent markets in the last quarter of 2011.
This led to many investors diversifying out of equities as
there was a perception that some funds were simply following
the direction of equity markets.

The appetite for launching European equity funds, the oldest
strategy in the alternative UCITS universe, seems to be waning
and, in the first half of this year, only four were launched
with a collective $69 million of assets under management.

It is unsurprising that this strategy has lost its
overriding share of assets – especially during a
period when directional strategies are falling out of favour
because of the severe volatility in equity markets.

However, strategies with fewer assets have the most
potential to grow as institutional investors diversify their
strategy choices. This is highlighted by the fact that global
equity, emerging market equity, fixed income and macro all
raised more assets in new funds than European equity, according
to our June 2012 new fund survey.

More asset managers will launch these strategies as demand
from pension and institutional investors increases. As a
result, there will be asset-raising opportunities for
strategies such as volatility, credit, CTA, managed futures and
currency funds as institutional investors feel increasingly
driven by the need to divest out of cash into riskier
assets.

Alternative UCITS vehicles increased to 453 funds by June
2012 from 427 funds in June 2011. Assets under management have
remained essentially flat at $116 billion in June 2011 and in
June 2012 – but have increased from $113 billion in
December 2011 when there were 479 funds. Nevertheless, a
favourable macro environment – especially if the
eurozone crisis is resolved – could result in an
overall expansion of assets.

FUTURE OF UCITS-COMPLIANT INVESTMENT
STRATEGIES As more and more individuals become responsible for
looking after their own retirement income in markets as
variable as Sweden, Chile and Peru, they will increasingly turn
to UCITS-compliant vehicles to meet their income needs.

As pension contributions increase, individual investors will
want to diversify risk and this change will benefit those asset
managers that offer investment diversification such as
multi-strategy and mixed arbitrage or multi-asset
portfolios.

Providers of defined contribution pension schemes are
attracted to UCITS because they are well regulated and there is
a consistent framework which could pave the way for
pan-European schemes.

Meanwhile, bureaucrats in the European Commission are
currently discussing the – appropriateness –
of UCITS-compliant funds, that employ sophisticated investment
strategies, in its latest consultation of what is unofficially
dubbed as UCITS VI.

Under the current rules, UCITS-compliant funds are required
to invest in financial instruments to meet the liquidity
requirements of the fund.

The directive also allows funds that adopt the UCITS
framework to gain exposure to non-eligible assets, such as
commodities, in a number of ways: financial indices using
financial derivative instruments, closed-ended funds or
structured transferable securities.

European regulators, meanwhile, want investors to be able to
replicate the strategies of UCITS-compliant commodities and CTA
funds which typically gain access to these sectors by employing
financial indices. However, many managers of these financial
funds do not want to disclose their methodology to investors,
despite the regulatory demand for more transparency, and may
decide to withdraw from offering this type of strategy within a
UCITS framework.

The latest consultation document also points out that a
sound financial services industry should benefit investors, as
well as the economy, in the long term, and broaden the
investment choice by making long-term investments
available.

It has also suggested that UCITS could be used for
investment strategies such as direct investments into unlisted
companies, infrastructure projects, real assets, and
third-party managed funds that are investing in unlisted
companies, and could channel money to the European Social
Entrepreneurship Funds.

As the consultation document explains: "Although long-term
investing only offers returns over the long term, such
investing may better contribute to the financing of new
projects and expansion plans that normally require longer time
horizons for completion."

The document also points out that the industry has been
asked by the European Commission if UCITS rules need to be
modified or whether a stand-alone initiative might be more
appropriate for these kinds of investments.

The increasing
strategy diversification indicates the UCITS sector is
undergoing a maturing process. The recently published Absolute
UCITS Awards (see winners, below) reflects how the
sector is evolving.

This is highlighted by the global equity fund, DNB TMT
Absolute Return, run by Oslo-based Anders Tandberg-Johansen at
DNB Asset Management. The fund employs a technology, media and
telecoms strategy and provides an example of the newer
strategies that are offered within the UCITS wrapper.

Some continental boutiques have also been doing well, such
as Munich-based Assenagon Asset Management, which has attracted
over $1 billion into its UCITS-compliant credit hedge fund
aimed at institutional investors. Credit has been one of the
most popular asset classes in terms of attracting assets and by
the number of funds launched in alternative UCITS in the past
couple of years.

Old Mutual Global Equity Absolute Return was one of the best
performing risk-adjusted funds during the reporting period
covered by the awards, when it returned almost 13%. It
massively outperformed the composite index, which was down
0.69% over the same 12 months, demonstrating that
UCITS-compliant funds can deliver impressive performance.

The giant Global Absolute Return Strategies fund, managed by
Standard Life Investments, won the hotly contested Fund of the
Year award. The strategy is the largest in the Absolute UCITS
database with assets of around $20 billion and has captured the
interest of investors globally – which is not
surprising, given it returned an enviable 6.81% with a Sharpe
ratio of 0.97 over the 12-month reporting period that the
awards were assessed.

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